Medical Practice Valuation: Understanding the Process and Importance for Practice Owners

What is a doctor’s office worth if you plan to sell and retire?

Recently, my father has been considering selling his pediatrics practice to the extensive hospital system in town as his path to retirement. He wants to travel more and step back while leaving his patients in good hands.

For years, he held out, but increasingly, it’s hard to find someone who wants to take over a practice rather than work for a larger system that provides the support and benefits.

He’s one of the last few solo pediatricians in a rural town with more than 50% Medicaid coverage. As he started exploring his options, I wanted to explore some potential market implications of selling. And let’s face it, it’s been a hard few years.

I know primary care practices that were functional before COVID and essentially shut down to focus on hospital-based care. It was just too difficult to navigate the complexities of billing, cash vs. insurance, and building a practice from scratch in such a volatile time.

At Carbon Health, my colleagues were involved in acquiring urgent care and primary care practices primarily to enter regions where insurance contracting made it difficult if not nearly monopolistic *Cough* United Healthcare in Las Vegas *Cough* without acquiring as a path to scale and negotiate with payers as a prominent service provider.

Like many physicians, we’re all too aware of private equity buying and consolidating practices.

The story is almost too familiar. An early career physician plans to be a partner, and the senior partners choose to sell. The young docs don’t have much say and often are stuck because it was not something they contemplated or had the ability to negotiate.

On the other hand, the business private practice docs create a significant source of their net worth, so it is tricky to ‘not sell out’ as it can be an essential part of the wealth creation they have worked so hard for.

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Recently, in private communications and our group, the question of fair market valuation has come up with answers ranging from 3-5x EBIDTA all the way to 15-20x EBIDTA.

While the raw multiple of earnings is an essential factor, there are so many other parts of a deal that are important:

• Outcome for your patient’s
• Outcome for staff/employees,
• The relative value to the region (aka market share)
• Goodwill and intangible assets
• Active patient charts
• Capital equipment

Dr. Pezzi noted, “This very much depends on a lot of factors, top-line revenue, number of providers, assets they own, locations, amount of competition, etc.”

That said, I set out to do an informal survey of what physicians think a practice should sell for in terms of EBIDTA.

Which Multiple of EBIDTA Do Medical Practices Sell For?

Based on our survey of 7,700 physicians on the value of a medical practice based on Earnings Before Interest Depreciation Taxes and Amortization (EBIDTA):

• 4% responded a practice is worth 1x EBITDA
• 4% responded a practice is worth 2x EBITDA
• 22%responded a practice is worth 3x EBITDA
• 17%responded a practice is worth 4x EBITDA
• 49% responded a practice is worth 5x EBITDA

This survey was not without controversy.

Many people felt strongly that doctors should not be selling their practices and profiting from the healthcare business. Others commented that selling it is raising the price of healthcare for all.

Lastly, some doctors thought doctors should find a way to keep practices in the profession like lawyers do. Even selling to nonprofit healthcare systems was debated as unappealing given that hospitals squeeze profits from the healthcare workers in the guise of ‘non-profit.’

This makes sense, but life is not so simple, given the situation and circumstances for many who have built an asset just like housing that society needs and can have a big implication for a provider.

Aside from the cash, there are few exit ramps other than shutting down, especially in rural places, that allow physicians to transition their care to another doctor or health system.

Fundamentals of Medical Practice Valuation

So, what are the fundamentals of valuation? Medical practice valuation is the process of determining the fair market value of a medical practice.

This value represents the price a willing buyer and seller agree on in an arm’s length transaction. The valuation of a medical practice is a complex process that requires a thorough understanding of the healthcare industry and the practice’s financial and operational aspects.

Several factors affect the value of a medical practice, including:

• The practice’s financial performance
• Patient base
• Location
• The competitive landscape

A valuation expert will typically consider these factors when determining the value of a medical practice.

The income approach is one of the most common methods used to value a medical practice. This method involves estimating the future cash flows the practice is expected to generate and then discounting them back to their present value.

The income approach is based on the assumption that the value of a medical practice is directly related to its ability to generate income in the future.

Another method used to value a medical practice is the market approach. This method involves comparing the practice to other similar practices that have recently been sold.

The market approach is based on the assumption that the value of a medical practice is directly related to the prices paid for similar practices in the same market.

Lastly, the asset approach is also used to value a medical practice. This method involves estimating the value of the practice’s assets and subtracting its liabilities to arrive at its net asset value.

The asset approach is based on the assumption that the value of a medical practice is directly related to the value of its assets.

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Regulatory Considerations

When valuing a medical practice, it is necessary to consider the various regulations that govern the healthcare industry.

Failure to comply with these regulations can result in significant penalties, fines, and legal issues. This section will discuss the key regulatory considerations that impact medical practice valuation.

Stark Law

The Stark Law, also known as the Physician Self-Referral Law, prohibits physicians from making referrals for certain designated health services to entities in which they have a financial interest.

The purpose of the law is to prevent financial conflicts of interest that could lead to unnecessary or inappropriate medical services. When valuing a medical practice, it is important to ensure that the valuation considers any potential violations of the Stark Law.

This can be done by analyzing the practice’s financial relationships with other entities and determining whether any of these relationships violate the law.

Anti-Kickback Statute

The Anti-Kickback Statute prohibits exchanging anything of value in return for referrals for services paid for by federal healthcare programs such as Medicare and Medicaid. This includes cash, gifts, and other incentives.

When valuing a medical practice, it is important to ensure that the valuation considers any potential violations of the Anti-Kickback Statute.

This can be done by analyzing the practice’s financial relationships with other entities and determining whether any of these relationships violate the law.

HIPAA Compliance

The Health Insurance Portability and Accountability Act (HIPAA) regulates the use and disclosure of protected health information (PHI).

Health insurance companies, federal programs such as Medicare and Medicaid, doctors, hospitals, clinics, and even pharmacies are obligated to follow HIPPA regulations.

When valuing a medical practice, it is important to ensure that the valuation considers any potential violations of HIPAA.

This can be done by analyzing the practice’s policies and procedures related to the use and disclosure of PHI and determining whether any of these policies or procedures violate the law.

Intangible Assets and Goodwill

In a medical practice valuation, intangible assets and goodwill often play a significant role in determining the practice’s value.

Intangible assets are non-physical assets that cannot be seen or touched but still have value. Goodwill is a type of intangible asset that refers to the value of a practice beyond its physical assets and liabilities.

Intangible assets can include a variety of factors, such as the practice’s reputation, patient base, and referral network.

These assets can be difficult to quantify, but they can significantly impact a practice’s value. For example, a practice with a strong reputation and loyal patient base may be worth more than a practice with similar physical assets but a weaker reputation.

Goodwill, in particular, can be a significant factor in determining a practice’s value given practices have brands and service value to the patients in an area. It represents the value of a practice’s reputation, patient relationships, and again, the referral network.

Like a strong reputation, goodwill can be difficult to quantify, but it is often a crucial component of a practice’s value.

Final Thoughts

Ultimately, I’m not sure if my father will be able to come to a deal that allows him to transition, ramp down his practice, and serve his patients while the local health system ingests it, but it is a complicated decision that is both professional and impacts his retirement.

I think we can all agree this is a complicated topic. While I’m not against doctors selling their businesses in the context of American capitalism, it is unfortunate that, as a community, physicians do not feel there is a good steward to transition decades of hard work for their medical practice.

Key Takeaways

• 49% of doctors believe practices should sell for >5x Multiple of EBIDTA.
• Medical practice valuation is the process of determining the fair market value of a medical practice.
• The fundamentals of medical practice valuation include understanding the different approaches to valuation, regulatory considerations, and financial analysis.
• Goodwill and intangible assets can be significant factors in medical practice valuation is an art more than science.

Frequently Asked Questions

How is EBITDA used in determining the value of a medical practice?

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric that is commonly used to determine the value of a medical practice. It is calculated by taking the practice’s revenue and subtracting its operating expenses. EBITDA is used as an indicator of the practice’s profitability and is often used in conjunction with other valuation methods to determine the practice’s overall value.

What factors contribute to the goodwill value of a medical practice?

Goodwill value is the intangible value of a medical practice and is often a significant factor in determining its overall value. Factors that contribute to the goodwill value of a medical practice include the practice’s reputation, patient base, location, and staff. Additionally, the practice’s relationships with other healthcare providers and its involvement in the community can also contribute to its goodwill value.

What methodologies are commonly used to value a dental practice?

The most common methodologies used to value a dental practice include the income, market, and asset approaches. The income approach is based on the practice’s expected future cash flows, while the market approach is based on the prices of similar practices in the same geographic area. The asset approach is based on the value of the practice’s tangible and intangible assets.

Can you explain the buy-in formula for new partners in a medical practice?

The buy-in formula for new partners in a medical practice typically involves a calculation based on the practice’s value, the new partner’s percentage of ownership, and the payment terms. The formula is designed to ensure that the new partner pays a fair price for their ownership stake in the practice while also providing a reasonable return on investment for the existing partners.

What are the typical valuation multiples for chiropractic or orthopedic practices?

Valuation multiples for chiropractic or orthopedic practices can vary widely depending on a number of factors, including the practice’s location, patient base, and revenue. However, typical valuation multiples for these types of practices often range from 2 to 4 times EBITDA.

How can one accurately determine the worth of a podiatry practice?

To accurately determine the worth of a podiatry practice, a valuation expert will typically use a combination of the income approach, the market approach, and the asset approach. This involves analyzing the practice’s financial statements, patient base, location, and other factors to arrive at an accurate valuation. It is important to work with a qualified valuation expert to ensure that the valuation is accurate and reliable.